Doing business, the Indian way

India has improved its ranking on the global ‘Ease Of Doing Business Index’ by 53 positions over the last two years. The country is also the fastest growing among all the major economies in the world. In spite of all the progress, a signature characteristic of the country is the dominance of its informal economy. According to data released by the International Labour Organization in 2018, 89% of the workers in India are employed in the informal economy. They contribute to 21% of the national gross domestic product (GDP). The members of the shadow economy are outside the ambit of the social security net and taxation liabilities.

In order to leverage the fortune of this segment, companies should customise their service offerings to cater to the needs of its underserved patrons. Universal financial inclusion is an important component of this objective. However, the largely informal nature of the country’s economy is a major impediment to the process. In this blog, I’ll deliberate on the obstacles that financial companies are currently facing in their efforts to accomplish universal financial inclusion in India and the way forward.

Myths vs. Realities

Operating informally makes it difficult for organisations and households to prove their creditworthiness - hence shunting them away from the financial inclusion objective. For instance, because they lack formal documentation of their income, financial institutions do not have the basis to trust their ability to repay loans. Not having a formal proof of residence makes companies wary of dealing with them because of the lack of a sense of permanence. Also, it is largely believed that economically backward classes have a hand-to-mouth existence and hence, they do not need financial services such as loans or insurance.

However, in my experience of over two decades in the financial services industry and working closely with members of these communities, I have realised that nothing could be further away from the truth. Let me explain why:

• They are surging ahead economically: 70% of India’s population belongs to the bottom of the pyramid with an annual household income of less than USD 4000. However, this factor is changing quickly owing to rising disposable incomes. Consequently, poverty levels at the bottom of the pyramid are declining rapidly. As they aspire for a better lifestyle, their needs on the financial services pyramid are also increasing.
•  They may be unbanked but are not unbankable: Since most of the members of these communities are employed in the informal economy, they receive their salaries in cash. Often, they are employed in seasonal sectors such as agriculture. During the peak season of their business, they have access to enormous funds while during other months, their income levels may witness a lull. To translate, these patrons often have a strong liquidity portfolio that they are unable to leverage to its fullest potential.
• They have ingrained a culture of integrity: Communities at the bottom of the pyramid are unusually close-knit. They place self-respect above everything else and hence avoid defaulting on their loan repayments out of the fear of harming their reputation and social standing. NPAs are often the lowest among these patrons.
• They are more entrepreneurial than the other communities: Income from a single source of livelihood - mostly from the informal economy, is seldom sufficient to fulfil the monetary requirements of these households. Simultaneously, they find it difficult to break into the formal sector because of the lack of relevant skills and qualifications. Hence, more often than not, members of these communities have multiple sources of income.  
• They lack awareness: Often, members of the economically backward communities lack awareness about the financial schemes etched out for their benefits. They presume that services offered by financial institutions are beyond their reach and hence do not explore them at all. 

Approaching the challenge of ‘Universal Financial Inclusion’:

As India takes the centre stage of global economic dynamics, the necessity of localising a macro business strategy is becoming essential for businesses to thrive in the country. What holds true for the USA - where less than 20% of the workers are employed in the informal economy – will certainly not hold true for India. Unearthing the fortune at the bottom of the pyramid calls for frugal innovation - low cost product and services that create perceivable value for patrons. Multi-national financial organisations, which pride themselves for their impeccable global practices should Indianise their offerings in such a manner that they cater to the circumstances of the lower income communities.

For instance, a thriving street-food vendor, owning a sandwich stall, may require a business loan to expand his business. However, he may not have access to formal documentation such as a bank statement or proof of income such as tax returns. The lack of paperwork should not become an impediment to his progress.  Financial institutions should approach the problem in a two-pronged manner: in order to determine his creditworthiness, they must determine his business turnover by assessing his daily use of raw material. They can get a fair idea by determining the number of personnel employed by the vendor and the number of bread loaves consumed by his business on a single day. Like in any business plan, there could be anticipatory periods of highs and lows. On basis of these calculations, the financial institutions can extend a business loan to the vendor. Simultaneously, the institution should increase the awareness among the vendor and his community members about the benefits of banking and having formal documentation in place.

To summarise, financial institutions should be innovative, empathetic and sustainable in their approach to determine the creditworthiness of members at the bottom of the pyramid. By writing them off as unworthy of credit, financial services companies will not just harm their own bottom lines but also do a great disservice to the nation’s prosperity.  

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